Every now and then a central bank publishes a research paper that inadvertently pulls back the curtain to reveal the insidious effects of monetary policy. A recent post by the German Bundesbank, published to defend central bankers from allegations of destroying savers, actually did just the opposite, demonstrating that central banks have over the past several decades actively hurt savers. In essence, their answer to criticisms that current monetary policy discourages saving is: “We’ve always engaged in policies to discourage saving.”
Saving is one of the cornerstones of a civilized society. The deferral of present consumption in order to consume more in the future is necessary for further growth and development. Without this type of future-oriented behavior, man would sink to the level of savages, living from hand to mouth and unable to improve and better his life. It is because previous generations have saved, invested, and accumulated capital that we are able to enjoy the quality of life that we do.
For most of us, it’s been drilled into our heads from childhood that the safest place to put our money is in a bank. When we hear “saving” we automatically think about putting money in a bank savings account. And how many us have read articles about the “8th Wonder of the World” – interest? Put your money in the bank on a regular basis and through the miracle of compounding interest you too could retire a millionaire and life a comfortable retirement, we’re told. Sounds easy, right? Only, it’s actually impossible.
As the Bundesbank stated: “Even before the onset of the financial crisis… the interest which bank customers received, particularly on their savings deposits, did not cover the rate of inflation. In fact, these spells of negative real interest rates have even held the upper hand, historically speaking. The average real rate of interest across the entire period (also excluding the financial crisis) was in negative territory for savings deposits and instant access deposits (‘sight deposits’) alike.”
Take a look at the graph above and then let that quote sink in for a bit – the average real rate of return on savings deposits at German banks from 1967 until the onset of the financial crisis was negative. Sure, the average saver may have seen a nominal increase in his account balance, but the whole time he thought he was getting richer he was actually getting poorer. The numbers in his account kept getting bigger, but the amount of goods and services he could purchase with that money was growing smaller and smaller.
That’s the insidious part of inflation – you think that you’re getting richer, but you’re actually getting poorer. And not only are your savings losing their purchasing power, the government is also taxing you on the nominal amount of interest you receive, so you’re actually in the hole even deeper. Very few people realize that that’s what’s happening, and so the social inertia of putting money in savings accounts continues. But as people begin to realize that their purchasing power is decreasing, their incentive to save is lessened, and they begin to consume more in the present, even to the detriment of their future well-being.
While this particular example applies to Germany, it wouldn’t be at all surprising to see these kinds of figures replicated in the United States, England, Japan, or any other major industrialized nation. The major beneficiaries of savings accounts are banks. Deposits provide a cheap and convenient source of funding for banks, which they can then loan out to make more money for themselves. With the average depositor being impoverished while the banks continue to make money, is it any wonder that income inequality is worsening? What’s needed is a banking system that serves the needs of savers and doesn’t promise them greater wealth while slowly expropriating them. Our goal at the Carl Menger Center is to develop and discuss the details of such a system, which will be the topic of future articles.
Image: Deutsche Bundesbank